When people hear the word downsizing, they often picture selling the big family home and moving into a small unit. But downsizing isn’t about size or the cost, it’s about having a home that suits your new stage of life. This could mean a smaller home, perhaps a single story, maybe a home more accessible – there is no set way to ‘downsize’.
Downsizing may mean a home with less maintenance or a smaller garden, but it doesn’t have to mean a reduction in bedrooms or space – if that is not what you want. The process also may not come cheaply. The cost of downsizing can vary depending on your plans.
While freeing up equity from your existing home can often be a common motivation for moving, it can also be a chance to pick a new home to suit your needs – both financial and the lifestyle you want. When you sell your home, the proceeds are generally included in your assets meaning they impact on your pension.
The home you buy with those funds is normally an exempt asset however if your new home costs less than your existing, the leftover funds will generally count as assets, potentially reducing your pension. Some people choose to overcome this by paying a bit more for their new home so they can retain more pension – the home you really love with the extra bedroom for the grandkids, the nicer view or upgraded finishes and more pension along the way.
What is the impact?
When your assets exceed the threshold, your pension reduces by $3 for every $1,000 of assets. That is, for every $100,000 of assets over the threshold you will lose $7,800 of pension. That’s income that can be hard to replace, especially if you’re investing conservatively.
Think about Bev, a pensioner with a $1 million home and $200,000 of investments.
If she downsizes an her new home is $600,000 her pension will reduce from $29,754 per year to $6,667 per year. If she spends $800,000 on a new home her pension will be $22,266 per year.
For those downsizing into a granny flat, retirement village or land-lease community rent assistance could apply. This can add up to $211 per fortnight on top of the pension while the Pensioner Concession Card provides access to discounts on many essentials which can add up quickly.
Getting this right and clearly understanding your options in black and white can make a significant financial difference. If you are considering downsizing, we would love to help you understand where you are at and all of your options. You can get in touch here.
The information contained in this article is of a general nature only and does not take into account your particular objectives, financial situation or needs. You should therefore consider the appropriateness of the advice for your situation before acting on it.
This article was based off an article written by Rachel Lane and the original can be viewed here.